A Call for Means Testing in Rent Regulation

Food and shelter are two of life’s basic necessities. For those who need assistance feeding themselves, the Food Stamp Program is available. This program issues monthly benefits that can be used to purchase food at authorized retail food stores. Food stamp benefits help low-income working people, seniors, the disabled and others feed their families. Benefits are provided through an electronic benefit card, similar to a credit or debit card.

In New York State, about three million residents received benefits from the food stamp program in 2010, up 11 percent from 2009 and up 65 percent from five years ago. About two-thirds of these recipients, or 65 percent, are in New York City. This figure has increased 25 percent since 2009. The program is federally funded, so the looming cuts to state and city budgets should not impact it; it has grown to $5.1 billion annually, up from $4.3 billion in 2009.

To be eligible to receive benefits, recipients must meet certain criteria relative to income and family size. The state and local governments have carefully scrutinized potential recipients to make sure they qualify, requiring that income and family size be proven. At the state level, a process of fingerprinting recipients is used to ensure that duplication does not occur, something that plagued New York’s welfare system for decades. At the city level, the Human Resource Administration is even more aggressive in conducting this controversial fingerprinting program than the state is.

Basically, the state and local governments want to ensure that this form of public assistance gets to the people who need it and seek to reduce the amount of waste, fraud and abuse that exist in far too many public assistance programs.

Given the size of the Food Stamps program and the mechanisms in place to produce an effective implementation, how outrageous would it be if the system were changed and cards were simply doled out in the city to the first two million people who walked out of Grand Central Station in any given year? Would you support a politician or legislative leader who endorsed such a program? What if an elected official suggested that these cards be handed out to everyone with seven letters in their last name or to everyone wearing brown shoes on the second Wednesday of every month? You would probably think this person had lost his or her mind and was unfit to be a legislative leader in New York, right?

If so, than you must have issues with the way shelter subsidies are allocated-or, should I say, misallocated-in New York. You see, our rent-regulation system is absolutely a form of public assistance, and this subsidy is paid for by the growing number of non-regulated residents of the state and the city.

There are presently about 3.3 million dwelling units in New York City, and about 1.4 million of those are “protected” under our rent-regulation program. Occupants in these regulated apartments are receiving a housing subsidy, which some people even refer to as “rent welfare,” and it’s paid for by taxpayers and those not lucky enough to have secured a nearly impossible-to-find rent-controlled or rent-stabilized apartment.

IF WE MAKE an assumption that the average difference between a regulated rent and a free-market rent is $400 per month, this means that the 1.4 million regulated tenants are being subsidized to the tune of about $6.7 billion per year. This subsidy is 31 percent larger than the food stamp subsidy in New York. Unfortunately, while the federal government provides the funds for the food stamp subsidy, New York taxpayers and non-regulated tenants and homeowners pay 100 percent of the rent-regulation subsidy.

How is the taxpayer charged, you might ask? The result of this $6.7 billion rent subsidy is that the real estate taxes collected on regulated properties are about $2 billion less than they should be. This means that everyone else’s real estate taxes are that much higher to make up the difference.

Additionally, it is not just single-family homeowners and co-op and condo owners who pay more as a result. The taxes on all other properties are higher, so even free-market renters contribute toward this subsidy. In actuality, if you come into the city and want to rent an apartment, you effectively only have 1.9 million potential choices rather than 3.3 million, as the turnover of regulated apartments is significantly lower than others. This keeps the 1.4 million regulated units relatively unavailable to new tenants. This constrained supply exerts upward pressure on free-market rent levels.

In fact, studies conducted by the Wharton School and M.I.T. have both confirmed that market rents would be lower in the absence of rent regulation, as there would be a larger available supply and a more efficient allocation as people would seek out the appropriately sized units as opposed to staying put just to preserve a subsidy. A combination of these higher rents and the disproportionately higher real estate taxes paid by non-regulated buildings create the subsidy paid by non-regulated tenants.

Awareness of the disproportionate tax burden paid by non-regulated tenants would be made abundantly clear if multifamily building owners sent rent bills to free-market tenants that broke out the portion of the monthly rent that was attributable to their enormous real estate taxes. Imagine getting a rent bill showing that “rent” was $1,540 per month and “real estate taxes” were $660, for a total monthly charge of $2,200. Many apartment building owners would like to do this, but without a concerted effort among a majority of them, this tactic is unlikely to gain any traction.

WHETHER IT IS FOOD-STAMP cards or rent subsidies, the dollars spent on various forms of public assistance are significant, and at a time when municipal budget deficits are at record levels, one would think that how these dollars were spent would be appropriately scrutinized. Our housing subsidy, however, is not scrutinized appropriately at all.

In New York, the housing stock is inefficiently allocated based upon tenure, not economic ability. Public assistance, in the form of rent subsidies, is provided to hundreds of thousands of people in New York City who simply do not need it. In those cases it is a freebie. Can we really afford this? The way rent-regulation subsidies are distributed is tantamount to the insane hypothetical methods of allocating food stamp cards mentioned above.

And don’t kid yourself that politicians and legislative defenders of the system are unaware of this. The fact is that while there are more non-regulated voters in this city than regulated voters, regulated tenants are far more vocal and much more likely to vote than their non-regulated counterparts. Moreover, many of these residents will vote based simply on a candidate’s position on rent regulation regardless of other ideological divides. If non-regulated voters knew how much it was truly costing them to support subsidies for people who don’t need them, perhaps the outrage would provide incentive to rally this voter base.

One of the biggest misconceptions about rent regulation is that it is an affordable-housing program. There is nothing about the program that measures affordability. In fact, affordability does not even enter into the equation. It would seem that the only logical way this program should be implemented is through a form of means testing. Simply put, tenants should have to qualify for rent subsidies just like people have to qualify for any other form of public assistance.

Tenant advocates vehemently oppose means testing, with two central arguments. The first is that it is the unit itself that is regulated, not the unit’s occupant. This position is laughable, as virtually all of the regulated units that become vacant are improved using an Individual Apartment Improvement bonus to raise the rent to more than $2,000 per month, which deregulates the unit. Additionally, the Major Capital Improvement pass-through creates tremendous motivation for the private sector to invest in the quality of the city’s housing stock. These MCI increases were implemented after the mass abandonment and arson that led to devastation in parts of the city in the 1970s. Owners who utilize these programs rarely, if ever, rent vacant apartments as regulated units. Therefore, the present system does not preserve the number of apartments available at artificially low rents. The second of the advocates’ arguments is that means testing would be too complicated and too cumbersome. This is also a ridiculous position.

Most tenants who sign a lease file a New York State tax return. Verifying income could be done relatively easily utilizing these returns. Why shouldn’t recipients of public assistance prove that they should receive it? Anyone who receives Section 8 benefits must prove that they qualify; anyone who rents an apartment in the 20 percent portion of an 80-20 project must, similarly, prove that they qualify for those units. Clearly, requiring regulated tenants to prove that they qualify for regulated status could be implemented quite easily.

The real reason that the advocates do not want means testing to enter the conversation is that those tenants who really abuse the system are those who contribute the largest amount of support to the advocates themselves. The tenants who make well into six figures and are regulated can afford to write a check for thousands of dollars a year to an advocate who will fight to protect them; they’ll still pay well less, in total, than they should.

Democrats in the State Assembly, along with other tenant advocates, would like to raise the rent level and income hurdles above which units can be taken out of regulation. Two bills were passed to increase the current $2,000 threshold to $2,700 and to increase the income threshold from $175,000 to $240,000. This is completely backward thinking.

Generally, tenants pay about 30 percent of their gross income toward housing expenses. If someone earns $240,000 per year, they could afford to pay $72,000 per annum in rent, or $6,000 per month. Even at $175,000 in annual income, a tenant could afford to pay $4,375 per month. At these income levels, it is not those who pay the highest rents that are abusing the system the most; it is those who pay the lowest rents. Why should someone earning $175,000 per year not have their subsidy protected if their rent is more than $2,000, yet be protected if they are paying only $500 per month? The subsidy to the latter tenant is much more burdensome than the one on the former.

With rent regulation expiring in June, this is a perfect time for the industry to support an effort to introduce means testing into the system. No one believes that rent regulation will be allowed to expire. It will certainly be extended, the only question is in which form.

There is no doubt that this city needs affordable housing, and I support all efforts to create all of the affordable-housing units that are needed. It would be best, however, if legislators could figure out how to create affordable housing without confiscating private property to achieve this objective.

It simply doesn’t make sense to have so many New Yorkers effectively subsidize, perhaps, hundreds of thousands of tenants who do not need this handout. Our present system of regulation does not take economic ability into consideration. The example of handing out food-stamp cards in a random manner is perfectly analogous to the manner in which New York allocates its housing stock. Particularly with state and city budget deficits at their current massive levels, means testing would conservatively increase tax collections by hundreds of millions of dollars per year. It would be a shame not to take advantage of an opportunity to make the system more logical and equitable for everyone. Unfortunately, logic often evaporates when politics gets in the way.

So when you wonder why your free-market rent is so high or why your real estate taxes keep rising, look no further than the manner in which rent-regulation subsidies are distributed to the public, often to those who don’t even need them.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,125 properties, having a market value in excess of $7 billion.